Monday, February 23, 2015

Sweeping the problem under the carpet

I doubt there is anyone (apart from the City criminal practitioners
themselves) who would say that we don’t have a major problem inside our
financial sector and the way it is administered.

Recent examples of massive wrongdoing by HSBC in providing
and maintaining facilities to encourage tax payers to evade taxes and launder
money out of their home jurisdictions, is merely the latest example of
financial criminality, by a financial institution against the financial
interests of the State. This was a conspiracy to defraud the Revenue, pure and
simple, and HSBC have defined themselves as criminal enemies of the State!

There cannot be another market sector where such a huge
volume of fraud, financial malpractice, dishonest conduct, and downright
crookedness is practised , but where so little is done to check its influence.

If these crimes were being committed by any other sector of
society, you may bet the farm that the Government would have mobilised an army
of investigators to prosecute them!

Every proposal made to bring any kind of formal oversight to
the control of the financial market however, is met with howls of protest and
acres of newsprint as the City marshals its army of supporters in the media,
the law firms, the accounting and consulting practitioners, to say why any kind
of intervention or new regulation is wrong in principle, will drive business
out of the City, and will be met by mass banker defections to other
jurisdictions.

One of the reasons why the City gets away with this exercise
in special pleading is because it has always managed to marginalise the views
of any person whose opinions they do not like, whose theories do not match
theirs exactly, who say anything other than that which is the accepted wisdom of
the milieu, or whose attitudes differ in the slightest degree from those accepted
by the City insiders.

Anyone whose views are informed but who has never worked
inside the City can be ignored on the basis that they have no empirical
knowledge on which to base an argument. Those whose views cannot be ignored are
qualified as being ‘out of date or embittered’.

The City likes to be able to say, when dealing with overt
wrongdoing, ‘...well, that was what things were like a few years ago, but of
course everything has now changed...’ Those of you who read the HSBC full page
advert last week will instantly recognise the model!

Nevertheless, this ability to simply ignore and brush off
the words or opinions of others, is a very powerful weapon in their armoury,
and they use this marginalisation process ruthlessly.

They do it through the age-old method of ‘taking soundings’
or ‘consulting widely’. In other words, whenever an issue that is likely to be
possibly contentious looks like arising, the powers that be within the Square Mie
will ring round their friends and colleagues and agree an accepted line of
approach, so that it cannot be said that anyone inside the magic circle was
taken by surprise.

This method of getting agreement on policy issues is of long
standing and works very efficiently.

Government understands this only too well, and doesn’t seek
to impose too high a degree of determinism when it comes down to gaining the
City’s approval of policy.

During the PPI farrago, when the banks had been caught with
their grubby fingers in the till over the fraudulent sale of PPI insurance
contracts, the Government worked assiduously with the City to find ways of
downplaying the possible consequences of the public perception of what had been
going on.

Instead of calling the PPI era by its proper name and title
which was ‘institutional fraud’, the Government re-named the practice as
‘Mis-selling’, a legal fiction, hitherto unknown to English jurisprudence.

Well, you couldn’t really let it be known that the British
banks had been engaging in an orgy of theft and fraud at their client’s
expense, could you? It would have sent a lot of wrong messages to others
elsewhere who might have thought twice about investing their money in the UK!

No, far better to call it ‘mis-selling’, whatever that might
mean, and allow others to form their own view. Mis-selling sounds so much more
benign than ‘stealing’ or ‘fraud’.

Another technique the City uses to avoid the consequences of
its misbehaviour is to claim and feign ignorance of the actual mal-practice being
carried out, so that if anyone asks the awkward questions, the matter can be
denied on a stack of bibles. You will have seen this repeatedly used by senior
bankers as the details of the Libor fiddles, and the Forex scams leaked out
recently. Suddenly, all these very high-powered bankers whose job it was to
ensure the profitability of their institution, were denying any knowledge at
all of the egregious techniques of enrichment alleged.

It is this power to ignore the obvious and pretend it isn’t
happening and then denying all knowledge of its occurrence that gives the City
its almost supernatural powers of survival.

I talked recently to a young academic who questioned whether
there was any real point in advertising the City’s erring ways. His case was
that there was no value to be obtained in prosecuting and convicting bad
bankers because the adverse publicity would have a negative effect upon the
willingness of outsiders to want to invest in London as a centre of integrity.

I pointed out to him that this was precisely what worked to
prevent bankers from cheating and stealing in the first place if it was known
that their bad behaviour would be publicised and attract attention.I quoted Justice Louis D Brandeis’s famous
aphorism to him – “..."Publicity is justly commended as a remedy for
social and industrial diseases. Sunlight is said to be the best of
disinfectants; electric light the most efficient policeman."

But after our conversation, I realised that of course,
preventing transparency and covering up wrong-doing is exactly what the City
criminal advocates. Anyone who suggests that to seek to hide the City’s crimes
is in the best interests of the body politic is merely inviting more criminals
to come in and and steal.

And this leads me to another of the City’s favourite
practices, which is ignoring anyone who isn’t in their club of thieves and
fraudsters.

This means that British bankers can routinely ignore any
other agency of control which operates outside the UK, because they do not
concede that they might have any influence over the British way of conducting
business.

So it is that when another regulator in another country
proposes involving themselves in the affairs of a British bank, they are met
with significant opposition, and more recently, with abuse. Take the case of
Ben Lawsky.

Benjamin Lawsky heads a new
financial regulator in New York called the Department of Financial Services (DFS).

He investigated Standard
Chartered Bank and accused the bank of conducting secret money laundering
transactions with Iran, triggering a 23.5% drop in share price. On August 14,
2012, Standard Chartered Bank agreed to pay a fine of $340 million (£220
million) to the New York State Department of Financial Services, conceding that
$14 million in financial transactions involving Iranian parties were in
violation of U.S. banking laws.

On June 18, 2013, the
Department announced that Deloitte Financial Advisory Services LLP (“Deloitte
FAS”) was fined $10 million and banned from advising banks in New York for one
year after accusing the firm of watering down a report about money-laundering
controls at Standard Chartered.

He is noted for targeting
individuals within the financial sector who commit wrongdoing, and not merely
handing out fines to the companies they work for, an approach he explains as
follows: "Corporations are a legal fiction. You have to deter bad
individual conduct within corporations. People who did the conduct are going to
be held accountable.”

Benjamin Lawsky is a very
powerful entity indeed, with a world-wide brief. He is someone to be taken very
seriously because he has the power to suspend or remove an individual bank’s
licence to clear US dollars in New York. This is the banking equivalent of the
kiss of death to any institution, should Mr Lawsky choose to exercise his
powers, and any foreign bank which has engaged in international acts of egregious
criminality could easily find itself on the receiving end of an order from
Benjamin Lawsky inviting them to contemplate their banking future, but without
the ability to clear US dollars.

Standard Chartered Bank, back
in 2012, made a promise to behave itself in future when it bought its way out
of a New York Department of Financial Services investigation into its affairs.
The bank ended up paying a total of $667 million in fines and became the
subject of a Deferred Prosecution Agreement to get out from under the threat of
further investigation.

All it took to return in
front of the Department was its failure to fully keep that promise.

At a public meeting following
the report of the findings and the agreement, questions were asked concerning
individual employee conduct and compensation following the deferred prosecution
agreements. the Chairman, Sir John Peace had replied, when asked about bonuses
for executives: "We had no wilful act to avoid sanctions; you know,
mistakes are made – clerical errors – and we talked about last year a number of
transactions which clearly were clerical errors or mistakes that were
made."

This was not what had been
agreed with the New York Authorities, and the words used sought to ameliorate
the egregious conduct complained of. This wilful refusal to acknowledge the truth
of the Deferred Prosecution Agreement resulted in an immediate riposte from the
US Authorities, and later, Sir John Peace, was forced to retract his comments
describing the breaches as "clerical errors" and apologised for
describing them as not "wilful acts" after US regulators were
infuriated by his comments at the bank's full-year press conference.

City banks are not accustomed
to being treated like that by mere regulators. The FCA usually knows its place
in these matters and never usually makes too great a degree of trouble for the
banks being disciplined. Well, the Americans are different!

Back in 2014, Ben Lawsky was
invited in his official capacity to attend a conference/seminar evening in
London and to make a short talk to an invited London audience of British and European
bankers, on the subject of "Consumer Financial
Protection & Enforcement".

The organisers had also
invited some other US speakers, Mr.
William K. Black – former US Regulator involved in cleaning up the
Savings and Loans Scandal in the late 1980's, and Mr.Neil Barofsky, formerly the the
Special US Treasury Department Inspector General overseeing the Troubled Assets
Relief Program. From the UK, Mr. Martin
Wheatley, the Chief Executive Officer of the UK's Financial Conduct
Authority and Mr. David Green CB
QC, the Director of the UK's Serious Fraud Office were invited to take part.

This would
have been a very interesting and valuable exercise in hearing from the
Americans how they viewed and intended to view further examples of criminal
behaviour which had an impact on US markets, and would have provided the
invited audience with some insights into US regulatory thinking in this sphere.

Imagine the
surprise on the part of the organisers of the event therefore to receive an
email from the FCA quite late in the day, saying;

“...Thank
you for requesting an FCA speaker for your event.

“...(We
apologise for the delay in our response but a lot of consideration was put into
your request and so a number of people needed to be consulted for their
opinion.)

“...We
have considered your request but unfortunately, on this occasion, we are unable
to provide a speaker. The FCA is extremely busy at present and we are being
more stringent in the assessment of requests and use of our resources...”

You
will not be surprised to learn that the conference did not go ahead!

You
will note that the FCA had adopted the traditional policy of ‘deep consultation’!
Quite why the FCA, the lead regulator needed so much time to consult on the
question of sharing a platform with Mr Lawsky, I simply cannot fathom.

What
does come across in a highly amplified form is the absence of any of the usual
courtesies which would normally be paid to a visiting regulator from a leading financial
centre, and someone with so much power in the regulatory field.

Not
to be able to field one representative of sufficient authority from the FCA to
share a platform with Mr Lawsky cannot be considered to be anything other than
the height of professional rudeness, and a deliberate slap in the face to him,
his office and by extension, to US regulators more generally.

No
doubt Martin Wheatley felt he had dodged a bullet by refusing to speak at this
event, but the whole affair speaks volumes about the way in which the British
Regulatory environment views itself and the way in which it conducts business.

It
is this kind of behaviour which enables the British financial sector to turn a ‘Nelsonian’
blind eye to the actions of other regulators and enables them to pretend that
they are immune from other regimes.

In
a similar case, some years ago, John Moscow, a New York specialist white collar
prosecutor was addressing a British audience on the subject of the rogue bank
BCCI. This Pakistani-owned bank had been operating from London for years and
had engaged in singular levels of criminal activity of many kinds. The New York
Authorities were on the verge of taking swingeing legal action against the bank
and its people, and Mr Moscow had attended a conference in Cambridge to liaise
with UK investigators and prosecutors.

In
his presentation, Mr Moscow warned the British banking regulators present on
the dangers of continuing to fail to take appropriate action against BCCI, even
when they were well aware of many of the dishonest activities that were being
perpetrated there.

He
said, (when talking about BCCI); ‘...It will be of no use trying to sweep this
one under the carpet...If you do, there will be no room left between the carpet
and the ceiling...’

Such
a warning is even more appropriate today, and after the latest exposees
regarding HSBC, need to be taken very seriously indeed! Snubbing a New York
prosecutor in future isn’t going to cut the mustard!

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About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!